• Fri
  • Aug 22, 2014
  • Updated: 6:11pm
CommentInsight & Opinion

No truly free market in China without free exchange of ideas

James Dorn says China has to reform politically to open up economically

PUBLISHED : Tuesday, 25 March, 2014, 7:00pm
UPDATED : Wednesday, 26 March, 2014, 5:07am

Beijing's decision to allow more flexibility in the daily trading band for the yuan-dollar exchange rate, along with the announcement that the People's Bank of China will soon allow banks to pay higher interest rates on deposits, are positive signs that the leadership is serious about giving markets more play. Ending financial repression, however, will require political as well as economic reform.

Free markets rest on institutions that protect private property rights and allow the free flow of information under the rule of law. Market prices provide information and incentives. Getting prices right is not a feasible function for government; only private free markets can do so through the interaction of millions of free individuals.

The real challenge that lies ahead for China is the contest between the individual and the state, that is, where to set the boundaries of state power and individual freedom

Exchange rates can be fixed, as under a gold standard, or they can be flexible. Both regimes are consistent with a free society, provided there are open capital markets. In mid-2005, China ended its peg to the dollar and announced its decision to allow market demand and supply to determine an equilibrium exchange rate.

But China has not made the yuan fully convertible and has an adjustable peg: the central bank sets the reference rate and now allows the daily trading rate to move within a 2 per cent band above or below the parity rate. There is no free-market exchange rate.

To prevent one-way speculation, the PBOC must allow some variation in the exchange rate. If China completely opened its capital markets, the threat of capital outflows would discipline the authorities to normalise the balance of payments, liberalise interest rates, safeguard the domestic purchasing power of the yuan and depoliticise markets. Those reforms, however, would require a much smaller state and a loss of power for the Chinese Communist Party.

If people were free to choose where to invest and what currencies to hold, decentralised markets would supplant state ownership and control of China's financial markets. When PBOC governor Zhou Xiaochuan says "eventually interest rates will be determined by market forces", he must understand that such a reform would undermine state power.

The real challenge that lies ahead for China is the contest between the individual and the state, that is, where to set the boundaries of state power and individual freedom.

Financial repression occurs when central banks manipulate interest rates and hold them below the rate of inflation, thus generating negative real rates. It also occurs whenever governments restrict capital freedom. Both the US Federal Reserve and the PBOC have engineered negative real interest rates that harm savers and encourage risk taking. But the United States has open capital markets and more secure property rights.

China has had robust growth for decades, but that growth is now slowing and government officials are calling for less attention on GDP growth and more attention to "rebalancing" and "harmonious development". Interest rate liberalisation will help China move closer towards markets and away from state planning. But halfway reforms can suppress the very market forces that need to be unleashed to enlarge the range of choices open to people.

State-owned banks that lend to state-owned enterprises are endemic to China's culture of party-led development. Until that culture changes, there can be no real capital markets in China, and financial repression will endure. The crackdown on free expression and the internet portend the future of China better than the ruling elite's promise to free up interest rates without facing the hard choices of freeing up the marketplace for ideas, upon which true capital markets rest.

James A. Dorn is a senior fellow and China specialist at the Cato Institute in Washington


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Formerly ******
Mr. bijoux:
You're right, but in the US, the morons (aka Democrats) can be voted out of office. Watch the 2014 midterm elections. Should conservatives win control of the US Senate, then there will be a reversal of this policy of stupidity, brought to the US by the party of the people. POTUS Obama wants to bring to the US the decaying, aging society of Europe with it cronyism (not much different from China's) with perpetual double-digit unemployment and less than 50% of the population working to support the other + 50%.
你是對的,但在美國,低能兒(又名民主黨人),可以投出辦公室。關注2014年中期選舉。應該保守派贏得美國參議院的控制權,然後會有一個逆轉這一政策的愚蠢的,由人民黨帶到美國的。 POTUS奧巴馬希望帶給美國的衰減,歐洲老齡化的社會,它任人唯親(來自中國的沒有太大的區別)與永久兩位數的失業率和工作,以支持其他+50%的人口不到50%。
Formerly ******
Mr. newgalileo:
Well, thank goodness you're not replacing the old Galileo. Your silent cry for help with English grammar has been heard by me.
First, your second sentence needs much work. The correct pronoun for "morons" would be who (used in adjectival clauses) and the correct pronoun for GOP is that (again, used in adjectival clauses). A simpler way would've been to write: 'The morons in the Democratic Party have done all that they can....'.
Second, how does one or how does a party "boycott the government?" What a marvelous and novel concept. Would this include not paying taxes? If yes, then you'll find that Democrats (affectionately known as DemonRats - all of have to do is change to the letter n the letter c) far outnumber Republicans when it comes to not paying taxes or even filing tax returns.
As to the remainder of your post, please note that sloganeering and left-wing ranting aren't worthy of a substantive response.
Anyway, thus ends the English gospel (not capitalized, because it doesn't refer to the biblical Gospels) lesson of (not for) the day.
首先,你的第二句需要大量的工作。正確的代名詞為“低能兒”會是誰(在形容詞子句中使用)和正確的代名詞共和黨是(同樣,用於形容詞子句) 。更簡單的方法會一直寫: “民主黨的低能兒所做的一切,他們可以......” 。
其次,一個人如何或如何做一個黨“抵制政府? ”多麼奇妙的創舉。請問這包括不交稅?如果是的話,那麼你會發現,民主黨人(親切地稱為DemonRats - 所有需要做的是改變字母n的字母c )遠遠多於共和黨人,當涉及到不交稅,甚至報稅。
無論如何,從而結束了英國的福音(沒有大寫,因為它不引用聖經福音書)課(不適用於該日) 。
Formerly ******
What an excellent point about economic and financial freedom being inextricably linked to one another. The government of China has a choke-hold on the economy and, unlike in the US, this can't be changed by election.
Thomas Jefferson, one of the founding fathers of America, said it best, to paraphrase, 'Any government that has to power to give to you anything, also has the power to take from you everything.'


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